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Cutting an oil artery

The virulently anti-American president of Venezuela, the fourth largest U.S. supplier, seems intent on severing those oil ties.

By DAVID ADAMS
Published February 7, 2005


MIAMI - It's been one of the longest-serving and most reliable oil suppliers to the United States. But for how much longer?

That's the question facing United States oil companies and the Bush administration after reports this week that Venezuela's revolutionary government is seeking to cut its U.S. oil ties.

Venezuela's state-owned oil company, Petroleos de Venezuela (PdVSA), is the fourth-largest supplier of oil to the United States, last year contributing 11.8 percent (1.52-million barrels a day) of imports. PdVSA also owns several major refineries in the United States, as well as the Citgo franchise, which has almost 14,000 gas stations across the eastern United States.

Venezuela's fiery leftist president, Hugo Chavez, has emerged in recent years as one of the harshest critics of the United States. He has repeatedly warned of his determination to reduce dependency on sales to the United States. Lately Chavez has taken to accusing the United States of "robbing" Venezuela of tax revenue, claiming that Citgo receives its gas from PdVSA at a discount.

Although his rhetoric may be grounded more in his revolutionary politics and social agenda than in economics, Chavez' effort to unnerve U.S. interests in the oil industry and beyond is working.

"We ought to be concerned about this," said Florida Sen. Bill Nelson, who was part of a small Senate group that traveled to Venezuela last month for a two-hour meeting with Chavez.

Chavez has continued his march. During a visit to Argentina this week, he hinted that he might sell off PdVSA's interests in eight U.S. refineries. "Not one Venezuelan works at these refineries," Chavez said. "They don't give us 1 cent of profit. They don't pay taxes in Venezuela. This is economic imperialism."

That came on top of news in January that Venezuela had suspended plans by Houston-based ConocoPhillips to develop a new oil field in Venezuela. Shortly afterward the government said it was reviewing 33 contracts with other U.S. and European oil companies dating back to the 1990s.

In order to replace oil sales to the United States, Chavez has begun shipping Venezuelan crude to China, the world's second-largest energy consumer after the United States. Venezuela also is reportedly looking into increasing its oil sales to Asia via a pipeline across Panama.

Venezuelan officials insist no decision has been made on the fate of Citgo. Were it to be sold, the process would likely take at least a couple of years to complete, say industry analysts.

To be sure, the potential loss of Venezuelan oil has sent shock waves through the oil industry. Even so, U.S. consumers need not be alarmed, officials say. Any loss of Venezuelan oil supplies would quickly be made up from other sources.

Analysts say the most likely effect would be that oil from elsewhere would probably be more expensive. Venezuela's oil is comparatively cheap for the United States because it's close and because it's a heavier grade that requires special refinement. Replacement oil would likely be of a lighter, better quality and would come from farther afield.

The potential disruption to Venezuela is likely to be much greater, they say. Oil is the lifeblood of Venezuela's economy, accounting for half of government revenue and 75 percent of exports. The United States buys 60 percent of Venezuelan oil products, and experts say finding new markets won't be that easy.

Chavez's statements have confounded U.S. officials, oil company executives and industry analysts alike, who point out that Venezuela's contracts are very advantageous to both countries. "Whatever he thinks of the U.S. he has got to deal with fundamental economics," said John Felmy, chief economist at the American Petroleum Institute, which represents major oil companies.

Chief among these is the close proximity of the U.S. market, which cuts transportation costs. U.S. refineries are also specially equipped to process Venezuela's sulphur-laden crude. While Citgo pays U.S. taxes, it also delivers a huge dividend to its Venezuelan parent company, worth $400-million last year.

Oil industry experts question whether Chavez can achieve his objective of breaking away from the U.S. oil market. The Panama oil pipeline he's eyeing pumps 100,000 barrels a day of Ecuadoran crude (from the Pacific to the Atlantic) for Gulf Coast refineries. The pipeline lacks the capacity to simultaneously ship Chavez's oil to China in the opposite direction, analysts say.

They also point out that Venezuela may be of only temporary interest for China, which is busy exploring for oil and gas closer to home in the South China Sea. On the other hand, if Chavez is serious about diversifying his client base away from the United States, now isn't a bad time to cash in his assets, analysts say. With high crude prices, Citgo would fetch a high price.

While U.S. consumers may not have so much to worry about, the implications for U.S. oil companies are bleak. Since John D. Rockefeller and Standard Oil began drilling in Venezuela early last century, foreign oil companies have invested heavily in Venezuela's vast oil fields. U.S. oil executives aren't saying much in public, but privately they fear being shut out of one of their most proven areas of production and exploration.

About twice the size of California, Venezuela is home to the Western Hemisphere's largest oil reserves at 78-billion barrels, as well as 1.2-trillion barrels of super-heavy crude in the so-called "Orinoco belt." Although production has waned in recent years, U.S. oil companies have made enormous investments on the ground and would be loathe to give them up, no matter how hostile the political environment. Instead, they probably would scale back operations to a minimum and wait for better times.

The prospects for U.S. foreign policy aren't great either. Until recently, U.S. officials tended to play down Chavez's anti-U.S. rhetoric, insisting that his bark was worse than his bite. But that view has changed markedly in recent months, driven in part by Chavez's significant political victory in August when he stoutly defeated a recall attempt.

His growing stature in the region, and his growing use of oil as means of leverage, comes amid mounting worries that a revival of leftist governments in Latin America could have wide-ranging political and economic implications for the United States.

"We have serious concerns," White House spokesman Scott McClellan said last week, when asked about Chavez's plan to reduce oil business with the United States.

Chavez's anti-U.S. hostility has peaked in recent weeks, including vulgar sexual insinuations about Secretary of State Condoleezza Rice. That followed Rice's comment during her confirmation hearings that Chavez had become "a negative force in the region." Indeed, the Bush administration recently began an interagency policy review to examine if relations with Venezuela require a new approach.

Pressure is also coming from Congress. The Senate recently called for a review of government plans "to make sure that all contingencies are in place to mitigate the effects of a significant shortfall of Venezuelan oil production, as this could have serious consequences for our nation's security and for the consumer at the pump."

And the Senate delegation made its brief visit to Caracas.

Though Chavez expressed a desire to explore ways of improving relations, Sen. Nelson is dismayed by his oil statements, as well as allegations that Venezuela is harboring leftist Colombian guerrillas.

"As much as I wanted a dialogue between our countries, it seems like (Chavez) has chosen a different path," Nelson said in a telephone interview. Nelson blamed the Bush administration for neglecting Latin America and not doing more to explore ways to defuse Chavez's anti-U.S. stand. He urged the administration to seek the intervention of other friendly heads of state in the region in an effort to try and woo Chavez. "Someone needs to tell him "You can't be the bad boy bully in the neighborhood,' " he said.

But it may be too late for that. Chavez's feelings for the United States have not been helped by clumsy U.S. diplomacy. In April 2002 the Bush administration rushed to welcome a coup attempt that briefly ousted Chavez from power. Washington was left with egg on its face when Chavez was triumphantly reinstalled a couple of days later.

For those who have studied Chavez's political philosophy and his rise to power, it comes as no surprise that he is challenging his country's special petroleum relationship with the United States.

Well before Chavez was elected president in 1998, he was explicit about the threat his plans represented to the United States. "Oil is a geopolitical weapon," Chavez declared in a 1997 interview. "And these imbeciles who govern us don't realize the power they have, as an oil-producing country."

Soon after taking office the next year, he hosted a summit of the Organization of Petroleum Exporting Countries, pushing for tighter quotas to raise prices.

While many saw his election as a simple backlash against decades of political corruption, his message of social reform went much deeper. Indeed, his campaign platform included a pledge to convert PdVSA into a vehicle for funding social projects for the poor. This became the central plank of his so-called Bolivarian Revolution, inspired by the South American independence hero Simon Bolivar.

It's also popular among Venezuelans who resent the country's failure to use its oil wealth to build a developed economy. According to a recent study, 60 percent of Venezuela's 24-million inhabitants live in poverty, earning less than $2 a day.

Experts say corruption and government waste are largely to blame. PdVSA was widely considered to be a model of efficiency in the industry, retaining a large degree of autonomy despite being state-owned.

But under Chavez that changed. Paradoxically, for a revolution that depends on oil money to sustain itself, the Chavez plan involves reducing investment and production. Money that PdVSA would have spent on maintaining and increasing oil production - at a time when weakening supply requires greater expense to return production to historic levels - is being spent on social welfare projects.

"Chavez has never wanted a big, competitive oil company," said Alberto Garrido, one of the country's top political analysts. "His objectives are macrosocial, not macroeconomic."

Chavez's determination to revolutionize PdVSA from within drove the company's employees to declare a strike in late 2002 that crippled oil production for two months. But Chavez called in the military and broke the strike. Chavez seized the opportunity to purge the company of its top management. Critics say it has since been packed with the president's political cronies and is rife with corruption.

Meanwhile, Chavez boldly talks about the need to promote a "multipolar world" - which translates into alliances with regional powers such as China, Russia and Iran - in order to compete with the United States. A close ally of Fidel Castro, Chavez sees himself as a champion of Latin American resistance to "the new world order" of global free trade. Echoing many on the left, he views free trade as nothing less than a conspiracy by the United States to satisfy its "imperialist" goals.

To that end, Chavez plans to launch a continental TV channel, Telesur, to promote his Bolivarian ideas. He also talks of creating Petro-Sur, integrating regional oil and gas industries.

"He's very explicit," Garrido said. "He sees it as a strategic confrontation. It's a war."

The irony, Garrido points out, is U.S. oil payments continue to subsidize Chavez's every move. "It's revolution against the U.S. paid for by American consumers."

Times correspondent Phil Gunson contributed to this report from Caracas.

[Last modified February 4, 2005, 23:44:02]


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